Move to check surge in bad loans, offset ongoing economic slowdown

The banking regulator has allowed more provinces to set up local asset management companies to handle bad loans owed by local governments and financial institutions, which have seen surging troubled assets amid the economic slowdown.

Municipalities of Beijing, Tianjin, Chongqing, and Fujian and Liaoning provinces have obtained approval from the regulator to do so, the Economic Information Daily reported on Tuesday, citing people close to the China Banking Regulatory Commission.

The decision was seen as an attempt by the government to further reduce the debt burden of local financial institutions including banks, which are facing a harsher business environment with rising non-performing loans and squeezed interest margins after the latest round of interest-rate cuts announced by the central bank.

The expansion of the local AMCs trial to a total of 10 cities and provinces also signaled the government's intention to eventually apply it nationwide, the newspaper cited an unidentified source close to the CBRC as saying.

The CBRC in July approved five local authorities including Shanghai for the first time to set up AMCs to help clean up banks' balance sheets. The move broke the dominance of the country's bad-loan management market by the big four national AMCs, namely Cinda, Huarong, Great Wall and Orient Asset Management.

"The 10 places basically have to deal with more bad loans than others and they have more incentives to participate in the trial," the newspaper quoted the source as saying.

Shandong province and Ningxia Hui autonomous region are also applying to set up their own asset management companies, according to the report.

The latest move by the CBRC also highlighted the increasing credit risk in China's banking system due to the current economic downturn and structural adjustment of industries.

Bad loans of commercial lenders have grown at the fastest pace in seven years as major borrowers in the sectors of real estate and infrastructure construction are grappling with serious cash flow problems.

The amount of non-performing loans in the banking sector reached a four-year high of 766.9 billion yuan ($124.9 billion) by the end of the third quarter of this year, the CBRC said.

Industry experts and bank executives said that allowing more local players to engage in the asset management business will add competition in the market and help make bad asset pricing more efficient.

It will also help improve transaction efficiency as local AMCs usually have more connections and better knowledge about the local business environment than the big four national companies, analysts said.

The asset management companies in China are often called bad-loan banks as they buy troubled assets from banks at a discounted price and sell them to investors via securitization to gain fresh liquidity or turn them into healthy assets through mergers and acquisitions.